Title insurance has become an important necessity do to the high risk involved in buying, selling or financing real property. The policy is insured at the date of transfer of the property from one party to the other for the cost of a one time premium charge set by the Texas Department of Insurance (TDI). It is valid from that point until the property again changes ownership.

While there should be no risks in transferring property, risks do exist. Many “hidden” hazards to property ownership may show up unexpectedly in connection with the property. Any one of them could mean a costly loss or require time consuming hours to clear. Title insurance protects the buyer from damages and expenses incurred because of these possible defects. The policy also protects the seller as to warranties and representation make at the conveyance of the property. The following are a few examples of hidden problems:

1. Confusion from similarity of names.
2. Forged documents.
3. Signatures of minors or mentally incompetent persons.
4. Mistakes in recording legal documents.
5. Undisclosed or missing heirs.
6. Fraud.
7. Invalid divorces.
8. Misrepresentation of marital status.
9. Unpaid taxes or mechanics liens.
10. Clerical errors in public records.
11. Wills not probated.

When a policy of title insurance is issued by First American Title Insurance Company, the buyer, and seller, can rest assured that his property is protected, subject only to its terms and exceptions. First American Title Insurance Company celebrated its first century of existence as a title insurer. We are among the nation’s leading title insurers in dollar reserves against policies issued. This means that First American Title has the strength, experience and reputation your agent should be looking for when recommending a g title company.

Prior to the actual closing day, there are several things you should do to be certain that your real estate transaction will close on time, and that everything will go smoothly. When you receive the final closing statement or HUD, you should go over all the calculations to be certain that your clients are given credit for all there deposits and any other credits due to them. Go over the entire lender and title fees to be sure they are what you have been quoted and that you agreed to. Check the math calculations on the closing statement. Errors do occur.

Carefully review the guarantee of title insurance, to verify the exact legal description of the property and any liens, encumbrances or other items, which may have been discovered on the property.  Verify that title has the correct vesting, or the way your clients want to take title on the property. This is important because to correct a vesting on a deed later on is time consuming and can be avoided if care is taken prior to closing.

Besides the paperwork that you must review and verify, you should re-inspect the property and or walk thru with your clients. Ask yourself, have all the necessary repairs or other corrective work been done that were promised to them? This is important so that your clients don’t arrive at there new home and find unexpected surprises.

Staying on top of your closing will guaranty a smoother and successful closing.

Please contact First American Title The Woodlands if you have any questions or concerns.

Who is answering the Wamu Cares number at 3 in the afternoon? Nobody.

A couple of weeks ago, I wrote a post about the Wamu Cares program launched by Washington Mutual to engage with their borrowers who are either in trouble or facing trouble.  I was impressed by their new website at www.wamucares.com that spoke in simple language about their commitment to working with their borrowers who are in trouble.

Well, that didn’t last very long.  www.wamucares.com is gone and now forwards to minor page off of their contact us page.  This page has dropped all of the sincere language about wanting to help and now lists different options for the various levels of pain that their borrowers are in.  OK, so less fluff and more substance?  Unfortunately not. 

Remember the client that I mentioned several weeks ago that submitted their Wamu Cares application? Well the 10 day turn around has come and gone times 2 with no response.  When the customer tried to contact “Wamu Cares” at the phone number listed at the top of their new webpage, they were given two choices:

1. “To get a new loan or refinance your current loan, select 1″
2. “For servicing questions on an existing loan, select 2″

… and into automated phone system hell you go.

So what’s the deal?  Now when you search “Wamu Cares” on Google, all you find are cynical and disappointed blog posts like this one.  Has WAMU stopped caring?  Would they rather wait for the government to bail them out? Was the response to their programming overwhelming and unmanageable?  Was their a management decision after the Chase acquisition?  Unfortunately, I cannot speculate an answer that has any type of positive reason. 

This real estate agent thinks it is borderline criminal how the big banks are handling this foreclosure crisis. Do I think banks owe it to their borrowers to release them from their obligations or save them from them? No, I don’t.  However, these are public companies with shareholders who expect their corporate officers to handle these problems intelligently. It doesn’t make any sense that a national lender would not dedicate comprehensive resources and manpower to respond to their borrowers who are having problems and are asking for help.  This would save their company money.  This protects their shareholders.  I cannot imagine that mortgage lender shareholders really understand how their companies are handling this crisis and allowing this management negligence. It just defies reason.

Tax and Politics and The Woodlands Real Estate

With the changing of the party of in power will come a change in tax policy so how will his affect The Woodlands real estate market?  Please understand that there’s no judgment coming from this real estate guy, only curiosity. 

President Elect Obama has campaigned on raising the capital gains tax rate so we can expect that this will happen shortly after his election.  I think this will have a direct impact on Woodlands real estate market and it will be a good thing.

The two days immediately following the election closed with a 900 point loss in the stock market, making it a record two day loss and I think this has everything to do with the anticipation of the capital gains tax rate increase.  The capital gains tax is the tax that you pay when you sell most investments like stocks or mutual funds.  For example:

1. I buy $5,000 of Microsoft stock.
2. I keep that stock for over 1 year and the sell it for $15,000.
3. This means I made a $10,000 profit – yea!
4. The capital gains tax taxes this profit at a percentage like 15%.
5. So the government would get $1,500 of my profit – boo.

Since the new administration is clear that they will raise capital gains taxes, it will cause investors to make some decisions.  The one that will affect The Woodlands real estate market is the obvious one… If I own a stock right now that is worth more than what I paid then I probably want to sell it before the tax rate goes up. The question then is what do I do with this money?  

The capital gains rate will also apply to investment real estate but in investment real estate, we have this uniquely wonderful and legal way to sell an investment property at a profit but not pay any taxes on the sale. This is called a 1031 tax-deferred exchange.  So, here is what I think will happen to The Woodlands real estate market as a consequence of the political changes in Washington:

1. We are going to see more selling of stocks and mutual funds as investors choose to take their profits out at a lower tax rate.
2. People are going to use this money to pay down debt including their home mortgages.
3. People are going to take advantage of the lower home prices and higher rents in The Woodlands rentals by buying entry-level homes as investment property.
4. This increased investor demand in entry-level homes in The Woodlands real estate market is much-needed right now and will help this problem we are currently seeing with home owners wanting to move in a home but having difficulty in selling their current home.

My answer is an unequivocal “YES”!

I watched investors snatch up foreclosure bargains in the 1980′s that resulted in millions of dollars in profit within 20 years…all while their tenants were paying down their mortgages.

Today, things are quite different – both in the underwriting of investor mortgages and in the availability of good cash-flow properties.  But with the collaboration of an agent experienced in the needs of an investor, there is still a lot of money to be made by investing in foreclosures.

In The Woodlands proper, there is currently only 12 properties listed as a foreclosure.  The least expensive is a 2100 sq ft home built in 1981 listed for $139,900.  On the other end of the scale, you will find a 5,800 sq ft home, built in 2008 with 5 bedrooms, 6 baths and a 3 car garage listed at $159.48 per sq ft or $925,000.

Outside The Woodlands, but nearby, there are many more foreclosures for you to consider.  It really depends on your investment strategy.  Few people would consider moving from The Woodlands into another community just to find a bargain.  But if you are “itching” to become a landlord…there are ample oportunities to leverage a little money into wealth in this market. 

Be careful though.  The reason why The Woodlands has so few foreclosures as compared to the surrounding communities is because of the stability of the homeowner’s investment.  This community prides itself in the ability to offer a great place for families to put down roots without fears of the “flavor” of their hometown being threatened by vacant, unkept houses in foreclosure. 

The Woodlands foreclosures rarely offer the deeply discounted prices found in other areas.  The reason why they are almost at par with regular pricing is clear…people will pay the price to be in this community.  Considering that foreclosures have many risks for investing, my advice is often to find something other than a foreclosure in this highly-sought-after neighborhood.

In my mind, there are only two good reasons to consider purchasing a foreclosure.  One is if you are thinking about moving into a different “type” of residence…like a more urban environment, acreage or something more rural.  Those less popular areas have some remarkable value pricing, so it would be a great time to consider that type of move.

The other scenario is the desire to become a landlord.  My recommendation would be to take a long-term approach to that plan.  There is a lot to understand about this type of wealth building.  I would be happy to set aside some time to strategize with you to consider all your options.  Do not hesitate to contact me for a complimentary consultation.

Kathi Frank, RE/MAX The Woodlands & Spring

Author, Trainer, Coach and Real Estate Agent

Serving the needs of buyers and sellers for more than 30 years

(281) 363-5828 direct line at RE/MAX

(936) 441-1314 home office and cell

Kathi@KathiFrank.com

The Woodlands United Methodist Church

My family has visited The Woodlands United Methodist Church for the past couple of Sundays and it is truly impressive organization.  I grew up in army base chapels around the world and my wife was raised Catholic.  For both of us, this is the first experience in a large community church like United Methodist.

• A page that quickly describes the church’s core beliefs: The Woodlands United Methodist Church Core Beliefs
• A page with some videos of their church’s grounds and buildings: The Woodlands United Methodist Churh Videos

Coulson Tough Elementary

My son Jack has had his first week as a kindergartner in Coulson Tough Elementary that is located in Sterling Ridge in The Woodlands.  The experience has been great so far.  Of course my wife Sharon is not too thrilled about the long drop off and pick up lines. They have it organized very well like a well-managed Sonic but we haven’t the “sweet spot” in terms of the best time to show up.  If you show up too early, and your kid is not waiting outside, then you have to do the lap of shame like at the airport and get to the back of the line. If you time it too late, then you’re definitely waiting. 

We were a little concerned at first because we consistently heard that The Woodlands schools were “very competitive” starting in elementary school.  Our son Jack is has a beautiful free spirit so we worried how he would respond if his first real school experience was very rigid.  So far, it has been “just right.”  Jack is learning at a surprising pace in such a short period and he still loves school. 

What we really like is the atmosphere and culture of the school. The school leadership has been very receptive to our questions and involvement which is a great sign. We have seen other schools where the administration had the attitude that it was their way or the highway.  We really appreciate the servant-style leadership of Coulson Tough’s staff.

→SEARCH THE WOODLANDS-area Realtor MLS←
(all the homes listed in The Woodlands and nearby areas)

Washington Mutual brings the love

Realtors all have their favorite “types” of transactions.  Some love helping buyers scour the town and find that perfect place. Some love marketing listings to help sellers move on with their lives.  I don’t know too many Realtors who really love working on transactions that involve a seller who is either in foreclosure or heading that way. 

Of course there is that special satisfaction of really helping someone who really needs professional-level assistance but these deals are painful.  I am not talking about the emotions and financial stress that the Realtor assumes; I am talking about working with mortgage banks who hold the distressed mortgage. 

If you have never been involved in a “short sale” real estate transaction or known someone who has, then you probably assume that a mortgage bank would be extremely cooperative and diligent when given the option of working out a deal that would save them from expensive foreclosure actions and owning another home they do not want to own.  Yes, you would assume that wouldn’t you…. but you would be very, very wrong.

A short sale is when a home owner owes more in loans than what their home is worth so the lender is asked to accept less than what they are owed.  So:

• Home owner owes $110,000 in loan(s)
• The house is worth $100,000
• it will cost about $7,000 in sales costs to sell the home
• The homeowner asks the lender to accept $93,000 instead of $110,000
• The lender weighs the cost of foreclosure versus the cost of this loss.

The home owner is in no way entitled to the lender accepting the short sale, but with home prices declining they are typically in the best interest of everyone:

1. the home owner avoids foreclosure and settles the debt with dignity
2. the lender loses less money, owns 1 less house, and can move on to the next file
3. the agent gets compensated for making this happen
4. the neighbors do not lose as much value in their own homes since a bank-owned home will sell for less than this sale.

Saying all this, the “workout departments” for the nation’s top lenders are notoriously horrible at responding to and “working out” these types of solutions. Even with the agents doing all of the heavy lifting: putting together endless packets and appraisals and evaluations, these lenders act as though they have much more important things to do than to return phone calls, reply to emails, and answer these written requests. 

My last short sale transaction was with Citimortgage who was shameful in their behavior.  They let two contracts fail by simply refusing to respond after 3 months of waiting for an answer.  I am not saying they refused… I am saying they refused to answer which I think is criminal.  Not to the home owner but criminal to their stock holders who deserve more diligence and commitment from these mortgage banks to do everything they can to reduce their foreclosure losses.

So, now I am working on a new short sale and it is with Washington Mutual (WAMU).  I am impressed so far.

1. My first call and I got a real person who was compassionate and informed.
2. She referred me to a website setup specifically for distressed borrowers that included all the information and even a down loadable packet. Wow, so I am not going to get some beat-up application that had been copied 7 times and barely legible. Nice work. 
3. The packet… only 2 pages and only the pertinent information is asked for.
4. The messaging and tone… well read it for yourself. At the top of the page, Wamu states:

We are in this together. We all face challenges, and by working together you may have options to avoid foreclosure. If you are struggling to make your mortgage loan payment contact us today to see if we can help.

Nicely said, Wamu.

5. Finally, the web address: https://www.wamu.com/customer_service/contact_us/WaMu_Cares. Notice the last part of the URL: “WaMu_Cares“  Again, nicely done.

The final test will be how Joe who answers the phone and has 23 other short sales to handle tomorrow responds- that’s where the rubber really meets the road.

Here is some other reading on this topic from some great blogs:

• http://www.raincityguide.com/2008/10/19/foreclosure-losing-the-american-dream/
• http://www.phoenixrealestateguy.com/homeownership-preservation-workshop-coming-to-phoenix-thursday-oct-23/1338
• http://agentgenius.com/?p=5609

Kevin Cornwell – The Tiger Woods of The Woodlands Mortgages

The Woodlands Real Estate Voice  welcomes Kevin Cornwell as a new contributor.  Kevin is a 8-year mortgage veteran, and an Executive Mortgage Banker with Leader One Financial in The Woodlands.  His office is at 4810 W. Panther Creek.

You may recognize Kevin from The Woodlands golf courses as he was a PGA golf pro at The Woodlands Country Club several years ago.  He is originally from Washington State which is where he began his mortgage career. 

Kevin is experienced with all types of loan options including the Texas Veteran Loans which are unique and very advantageous loans for those who qualify.  Welcome aboard, Kevin.  Kathi and I are hoping that your better-than-par writing will help improve The Voice’s journalistic handicap; we need some birdies.  (I cannot help myself.)

East Shore – The Garden District of The Woodlands

Located within Town Center of The Woodlands is a new community that offers a prestigious address and archetecture that is unique and special.  Far from the ordinary, these homes are designed for those with discriminating taste and ultimate convenience.

 Once you pass the entrance off of Grogan’s Mill, you are invited into a world of enchantment found in the park.  Both three story townhomes and the Villas overlook this park and enjoy the view and recreation available there.

The villas have a quaint presence on the park, with open balconies to enjoy the view and rear-entry garages to keep the street-side appearance attractive.

The townhouses stand stately on the other side of the park with a central entry to the garages for the complex.

Here are a few examples of homes that are available in East Shore…The Woodlands Garden District!

There is a large variety of housing products available and I have not shown all of these in the photos posted here.  Within this 260 acre lakeside environment, urban living is accomplished numerous green spaces, garden enclaves and walking paths.  It is an easy bicycle ride to The Woodlands Mall, Market Street or Mitchell Pavillion.  It is not only a place to live, but a graceful lifestyle reflecting your success.

If your taste and budget afford you the luxury of living waterfront on Lake Woodlands, there is no more presitgious address than East Shore.  Stately, luxurious homes grace the waterfront.  Each one demonstrates the discrimating and distinctive personality of the owner.

Part of The Woodlands downtown residential district, East Shore is a popular choice to those that want the convenience of being near shopping, medical facilities, transportation including access to I-45, the Hardy Toll Road and the George Bush International Airport.

If you would like to know more, I would be happy to arrange a time to give you a tour to see the many options available in Town Center, The Woodlands and East Shore in particular.

Kathi Frank, RE/MAX The Woodlands & Spring

Author, Trainer, Coach and Real Estate Agent

Serving the needs of buyers and sellers for more than 30 years

(281) 363-5828 direct line at RE/MAX

(936) 441-1314 home office and cell

Kathi@KathiFrank.com

Twenty years from now you will be more disappointed

by the things you didn’t do than by the ones you did. 

So throw off the bowlines.  Sail away from the safe harbor. 

Catch the trade winds in your sails.  Explore. Dream. Discover.

                      - Mark Twain

I hope today is filled with the peace and appreciation you feel for the opportunities that are a part of today’s American life…particularly in The Woodlands.

We are so very blessed in this area.  In spite of the ugly news that hits us in the face every day…when we really think about it, we are in a wonderful place…economically and experientially.

If you find yourself being taken in by all the bad news, take a little wisdom from Mark Twain (see quote above) and Tony Robbins.  In Tony’s new website, he explains how to survive this “Winter” in our economic times. 

Here are a few things that I learned from him:

1) Recognize the season – Pay close attention to your resources…those may be sources of money, inspiration, relationship or time.  Use all your resources wisely and prepare for Spring.

2) Look for opportunity in areas where others are too fearful to act – He sites the late Sir John Templeton who made vast fortunes in the 1930′s.  Templeton recognized that there are 4 stages of investing.  The first is born of pessimism, and that is the most profitable time to become involved.  The second is the growth stage that is born of skepticism.  This stage is similar to Spring because of the potential.  The mature stage follows and is full of optimism – this is the time to sell.  The fourth stage is the winter of investing. 

It appears that we may be in for some winter experience when it comes to our money and investments.  However, it is a time that is ripe with opportunity.

Take Mark Twain’s advice and “throw off the bowlines.” 

Take Sir John’s advice and invest during the “point of maximum pessimism.”

Take Tony Robbins advice and assess your resources.

And – Take my real estate advice.  I would love to introduce you to some new opportunities for profit.

Kathi Frank, RE/MAX The Woodlands & Spring

Author, Trainer, Coach and Real Estate Agent

Serving the needs of buyers and sellers for more than 30 years

(281) 363-5828 direct line at RE/MAX

(936) 441-1314 home office and cell

Kathi@KathiFrank.com

Do not hire these movers

Whether you are moving from one home in The Woodlands to another or crossing state lines, moving is a stressful.  Here are some lessons learned that can minimize the stress, spousal arguments, and budget breakers. 

1. Get property insurance prior to your move. Also called “renters insurance,” it is very inexpensive and goes well-beyond the coverages you probably have in your home-owner’s insurance policy.  Whereas your home-owner’s policy will not cover moves at all, a renter’s policy protects your stuff no matter where it is.  Movers are regulated by the government and they all provide a default coverage of 60 cents per pound which is nothing! Imagine if your grandmother’s dining room table is broken in half during a move and because it weighs 50 pounds, you get a check for under $40! 

2. Find out how the movers you are interviewing operate. Some movers contract out almost all of their work.  They will contract a driver who in terms contracts local labor on the loading side and then new labor on the unloading side.  This is not always bad unless the moving company hires unskilled labor rather than professionals who do this for a living.  Some moving companies actually keep the team together so you have the same team all the way through, which is probably best.

3. Minimize how many times your stuff is touched.  Moving companies make money by using one truck for more than one move.  This is not always a bad thing unless they have to load your stuff on a truck, then unload it into storage, then re-load it back on a truck and finally unload into your new home. Each time your stuff is moved around, you incur the obvious risks.

4. When pricing your move, make sure that you have your prospective movers do in-house estimates and provide a guarantee.  Some movers will provide you an estimate over the phone by asking you to describe what is in the home room by room.  If you use a mover based on this, then you will have to sign a waiver that the estimate was over the phone and could be substantially lower than the actual weight and cost.  A great moving company will do an in-house inventory and provide you a ”no higher than” price.  So if they have underestimated your weight, they will still honor the price. If they have overestimated, then they will reduce your cost accordingly.  You have the right to see the weight slip so definitely ask to see this.

5. Understand delivery windows.  Since you will probably be sharing a truck, your delivery time will depend on whether you were first or second loaded.  A great mover will give you a very tight 1-2 day window rather than a 7 day window.

6. You can save a lot of money packing your own stuff in boxes – a lot of money. However, I recommend you do not pack your own fragile items. If you pack them, the mover will not be liable for damages so pack as much as you can that is not valuable or fragile but leave these things to the experts.

7. Protect your valuables by being vigilant.  You should not have movers move any special jewels or special heirlooms.  If they are moving valuables, make sure that they are not loaded at the end of the truck where it would be easy for an unscrupulous loader to easily take off the truck once they leave your home.

8. Call me if you would like some mover recommendations.  We have hundreds of customers who have moved recently so we can provide some great referrals.

There are some advantages in being a seasoned real estate agent.  Sure, I struggle much more with the techie part of today’s profession.  But the experience of being in this business for several decades brings about a confidence that comes from observation.

As I mentioned in my post yesterday, the current crisis has many similar characteristics to the economic challenges of the 1980′s.  Not only did we have a rapid 20% reduction in stock values, but the Houston/Woodlands area was suffering from an “oil-bust”.  Layoffs were common among the largest sector of the area’s economy AND the Savings and Loans were failing on a regular basis.

But there were a group of people who made a huge amount of money from that decade.  They were not big “wheeler and dealers” with huge sums of money already.  They were people like you and me that saw an opportunity and had the intestinal fortitude to move forward in a way that has changed their lives.

Now is the time to follow their lead and reap enormous financial rewards

Smart people (Did you notice I did not say wealthy people?) started buying homes and became landlords.  Some of the houses were bought from individuals that needed to get out from under the mortgage.  Sometimes the bank participated in this sale (Contact me if you want to know about a “Short Sale”.)  Sometimes they were foreclosures.

The ones that made the most money, from what observed, were the ones that bought houses in the worst areas for immediate return on their money.  They focused on the areas where the foreclosures were so prevelant that entire communities were affected.  They bought houses that were so badly trashed that, after closing they went into the house with a garden hose to wash out all the debris.  They bought houses without appliances, even air conditioning units were sometimes missing.

They spent all their free time and much of their money to repair the house and bring it into rentable condition.  And renting the houses was not a problem at all.  After all, where were the displaced families to live?  They had lost their home to foreclosure or dire financial stress…but they weren’t going to take their families and live under a bridge.  They began rebuilding their lives by renting a home.

Once these savvy investors began to amass their inventory of houses, the cash was beginning to flow on a monthly basis.  They used that cash flow to purchase additional houses – fix them up – rent them and become landlords in the true sense of the word.

A word of caution:  Remember how I told you earlier about them investing in the hard-hit, high-foreclosure neighborhoods in the area?  You should know that those communities turned into virtual rental communities in the late 80′s and early 90′s.  The neighborhoods had a noticeable “feel” to them that prospective buyers noticed.  Someone wanting to sell one of these homes in less than 5 years would not have made the huge profits possible with waiting.

Then, within 5 years after the recovery, these communities began to rebuild again.  Houses that were originally sold by builders in the late 70′s for $80,000 – were then purchased in foreclosure for $35,000 and rented for $650-750 a month during the tough years – somewhere around 5 years later they were now selling for the original, pre-foreclosure prices and creating a nice equity position for those landlords.  As more and more landlords cashed in their investments, pride of homeownership became apparent and now those homes are selling in the range of $120,000.

A similar opportunity is available in today’s market.  The numbers are close to double the ones I quoted from the 80′s…but the opportunity is still present.  Imagine what it would feel like to invest 10% down payment into a house (let’s say around $100,000 to have easy numbers)…with a little “sweat equity” be able to rent the house for $1,400 per month…then be able to sell the house for something in the ball-park of $150,000 in 5 years.

It is possible!  Of course, I cannot guarantee these kinds of numbers.  But conditions are right to make this kind of wise investment.  Using the scenario above and assuming you bought 10 houses.  You would turn $100,000 (the down payments) into $1.5 million in less than 5 years.  Without assuming any principal paydown, you would have mortgages to pay off in the ballpark of $900,000 and would net a cool $600,000 profit – all while experiencing a positive cash flow on the properties for virtually the entire 5 years of ownership.

Please know that the economic scenario I have described is simplified and is based on some assumptions that cannot be verified.  I am using my past experience to forecast what can be expected in the future and we both know that the future cannot be predicted.

If you would like to have a complimentary consultation about whether this kind of investment vehicle might be a good choice for you, I encourage you to contact me.  I will spend the time necessary to help you analyse your own situation.  I will also put you in contact with lending professionals that can assist you in that analysis.

Just think about it!

Kathi Frank, RE/MAX The Woodlands & Spring

Author, Trainer, Coach and Real Estate Agent

Serving the needs of buyers and sellers for more than 30 years

(281) 363-5828 direct line at RE/MAX

(936) 441-1314 home office and cell

Kathi@KathiFrank.com

The FHA loan is special because it is insured by the FHA and designed for home buyers who typically cannot qualify for a regular loan (conventional loan as they call it) from your neighborhood bank or mortgage company. The FHA does not lend the money but it provides lenders an insurance policy so that if the borrower forecloses on the loan, the lender will be made whole by the FHA.  The FHA doesn’t actually give the loans, they just offer the loan requirements and insurance policy that makes the loan possible.  Without that insurance, no lender would ever provide a mortgage with such risky requirements: low down payment, great interest rate, it is assumable, lower credit score requirements, etc.

FHA has just announced some important changes that will affect borrowers who want to use the FHA loan in The Woodlands.  Here are the changes -

1. On October 1, 2008 the upfront MIP and monthly premium for purchases changed to:
   1. LTV > 95% 1.75% upfront / .55% annual (> then 15 year term)
   2. LTV < 95% 1.75% upfront / .50% annual (> than 15 years term)
   3. LTV > 90% 1.75% upfront / .25% annual (< than or = to 15 year term)
   4. LTV < 90% 1.75% upfront / none (< than or = to 15 year term)
   5. The upfront mortgage insurance is still financed into the loan and the annual premium, divided by 12 is added to the monthly payment. FHA streamline refinances have 1.5% upfront MIP rolled into the loan less any unused MIP.
2. On September 19, 2008, the policy changed regarding conversion of existing primary residence to a rental property (using rents to qualify):
   1. This is an important change and may keep some FHA buyers from being able to qualify for another home unless they sell their current home or can qualify for both house payments.
   2. To use rents from the existing home to help qualify for a new primary residence now requires:
      1. Proof of 25% equity in the current home. A drive-by appraisal less than 6 months old is required
      2. Exception to the 25% equity is a buyer relocating with a new employer or transferring to an area that is not a reasonable commute.
      3. When this applies there must be proof of the first month’s rent and/or security deposit. Must have a minimum one year lease.
3. On October 1, 2008 – Discontinuance of Non-traditional credit for qualifying:
   1. FHA will no longer allow a borrower with no credit score to purchase a home unless there is another occupant borrower on the loan with acceptable credit scores.
   2. Previously FHA allowed all borrower to obtain non-traditional credit such as history record of utility bills, phone bills, insurance payments etc. to qualify for a loan.
   3. When there is more than one borrower on the loan the following applies:
      1. One borrower living in the home has an acceptable credit score and one borrower has no score the loan IS eligible.
      2. The borrower living in the home has no credit score but a borrower not living in the home has a credit score the loan is NOT eligible.
      3. The borrower living in the home has an acceptable score and a borrower not living in the home has no score, the loan IS eligible.
4. Beginning January 1, 2009 – Minimum Down Payment is changing to 3.5%:
   1. The FHA down payment is going to 3.5% down.
   2. Buyers are encouraged to contract by December 31, 2008 if they have limited down payments to still qualify for the 3% down requirement.
   3. The seller can still contribute 6% of the sales price towards any costs.
5. Loan Guideline Changes for Converting a Primary Residence to a Rental Property
   1. What has changed? – In September ’08, both FHA and Fannie Mae made changes to mortgage guidelines for home buyers to rent their existing home and purchase another home to live in. The new changes to these guidelines require proof of equity in the home being rented. FHA now requires 25% equity and FNMA requires 30% equity to be able to use the rents to help qualify for the new mortgage.  Prior to these changes, a borrower was able to use 75% of the rent from the home they were moving out of to offset the existing mortgage payment to help qualify for the next home. In essence, this meant that only 25% of the payment on the previous mortgage payment would be used in the total debt ratio of the new home purchase. The borrower was required to provide a copy of the rental lease to use the rent credit.
   2. Why the changes? – The reason for these changes has to do with concern on the lenders’ part that borrowers, having little or no equity in the home they want to rent, are putting themselves at risk if they have vacancies or need to sell the rented home unexpectedly.  Both loan types now require a recent appraisal proving the value of the home being rented. A drive-by appraisal is allowed which is a little less expensive than a full inspection appraisal.  In addition to an appraisal, the new guidelines require a signed lease for a minimum of one year on the rented home. The borrower will also have to provide proof of receipt of the security deposit and/or the first month’s rent.
   3. Exception to the change – There is an exception to the new rule if the borrower is relocating with a new employer or is being transferred by the current employer to an area that is not a reasonable commute. Then the 25-30% equity will not be required.  Home buyers that can qualify for both mortgages without using rental income will not be affected by these new guidelines. This is not typically the case for the average homeowner, but checking with a knowledgeable mortgage lender who can sort through the numbers will help the borrower know if they can buy another house and rent their current home instead of selling it.
   4. Will this delay home purchases? – These new changes may affect a great many potential home buyers who are hoping to purchase a home at today’s low prices and then wait until the market improves to sell their previous home. In the past, it was easy to rent the first home and still qualify for the next home by just providing a lease. Now, many potential home buyers own homes that they obtained with little to no down payment.  Falling home prices have also reduced the equity position for many homeowners in the last two years. These homeowners will not have the required equity to be able to use rental income to qualify to purchase another home. They may now have to sell their existing home before they can purchase a new primary residence.